EXPLAINER-What’s behind the wild surges in global LNG prices and the risks ahead
In less than a year and a half, liquefied natural gas (LNG) prices have lurched from record lows to record highs, with the market first reeling from the impact of the pandemic and now unable to keep up with a global recovery in demand. Demand jumped on economic growth plus a cold northern hemisphere winter followed by a hot summer, while supplies have been stymied by production problems. Recent power curbs and outages across China due to coal shortages have only exacerbated competition between Asia and Europe in securing sources of energy. That’s led to LNG prices hitting $34 per million British thermal units this week compared with just under $2 mmBtu in May 2020, while European gas prices have catapulted 300% higher this year. HOW BAD IS THE SUPPLY-DEMAND MISMATCH? Gas inventories remain critically tight in Europe and Asia which together account for 94% of global LNG imports and over a third of global gas consumption. Most major LNG producers are operating at or close to full capacity and have allocated the vast majority of their shipments to specific customers, leaving little prospect of a short-term fix. According to the International Gas Union, only 8.9 million tonnes per annum (mtpa) of a total 139.1 mtpa of planned new liquefaction capacity is expected to come online in 2021. Some of that additional capacity has been delayed by COVID-19 movement restrictions that have stopped or dragged out construction and maintenance work at several key sites including in Indonesia and Russia over the past year. So far this year, 288.1 million tonnes of LNG has loaded for exports globally, just 7% growth over the same period last year, Refinitiv data shows. WHAT ARE THE RISKS AHEAD? Buyers may struggle to buy enough gas for restocking and use. Less wind in Europe lately has boosted gas usage by power stations there, while in China power is being rationed https://www.reuters.com/world/china/china-power-crunch-slams-factories-coal-lobby-warns-not-optimistic-supply-2021-09-30 to industry and some residential users, triggering a jump in LNG imports. Current long-range forecasts call for a mild winter in much of Asia this year, but the market fears a repeat of the 2020/21 cold snap could lead to a buying binge similar to the one in January that fired up prices. “At the extreme, it would not be a surprise if some gas or LNG cargoes could even change hands in the $100/MMBtu range, or ~$580/bbl in oil-equivalent terms, based on observing how prices have spiked in the U.S. gas market, for example, over the past ten years,” Citi said in a note to clients last week. HOW DID WE GET HERE? Spot LNG fell to a record low of $1.85/mmBtu in May 2020, when coronavirus containment measures snuffed out power demand just as new supplies from major producers including Qatar, Australia and the United States flowed onto the market. LNG producers slashed production, reducing shipments through the 2020 summer which have had a lasting impact on global gas inventories. The 2020/21 winter freeze then caught many power providers short, sparking a surge in spot demand and tightening gas stockpiles further just as logistics constraints slowed delivery times. Those factors and high shipping rates sent LNG spot prices rocketing to a record $32.50 per mmBtu in mid-January, though prices returned below $10 by the end of the month. Prices have since bounced back. European buyers struggled to rebuild stocks, with a hot summer boosting air conditioner use just as high carbon prices forced power generators to cut coal use and burn more gas. Gas field maintenance in Norway and lower volumes from Russia also cut supplies. Higher purchases by Asia on growth in Chinese demand and stock rebuilding exacerbated Europe’s shortfall, resulting in Europe-bound shipments through August sliding 18% from the same period in 2020, Refinitiv data shows. That left Europe’s gas inventories at 50-60% full by late summer, compared to 80% in the same period last year. The current re-stocking wave is now fuelling Europe’s surge in gas prices. WILL SUPPLIES BE FORTHCOMING? Apart from COVID-19-related project delays, the global energy sector pivot away from fossil fuels towards greener energy supplies has slowed investment in LNG infrastructure. That has hindered the ability of producers to quickly deliver more supply to market, said Charif Souki, co-founder of U.S natural gas company Tellurian. “The world was kind of lulled to complacency because prices were low for five years so no one felt an urge to plan and everyone got very religious on environmental protection and it is wonderful – we should be – but we should look at what things actually work rather than simply what we hope for,” he added.
India’s energy demand grows at slower pace in September
India’s fuel and electricity consumption grew at a slower pace in September compared with August, government data showed on Friday, despite a recovery in factory activity. Sale of gasoil, which accounts for about two-fifths of India’s refined fuel demand, by state retailers rose 0.79% in September, preliminary government data showed. Gasoil sales rose 16% in August compared with last year. Electricity consumption rose 0.8% in September, compared with 17.1% growth in August, data from federal grid regulator POSOCO showed. India’s factory activity improved last month as a recovery in the economy from the pandemic-induced slump boosted demand and output, a private survey showed on Friday. It was not immediately clear why there was a slump in the pace of energy demand growth. Gasoline sales rose 6.57% in September, compared with a 13.6% rise in August. State-run Indian Oil Corp, Hindustan Petroleum Corp and Bharat Petroleum Corp Ltd own about 90% of the country’s retail fuel outlets.
BPCL to up gasoline output amid low diesel use
Indian state-controlled refiner BPCL will increase gasoline production to mitigate lower diesel demand, which is unlikely to rise in the coming years, the company’s executive director for international trade DV Mamadapur told Argus. “BPCL is producing around 49pc of diesel and 19pc of gasoline. Earlier, the gasoline-to-diesel ratio used to be 1:2.3 or 2.4, now it has come to 1:1.5 or 1.4. So the gasoline requirement has increased and to commensurate with, diesel is not increasing,” he said. Gasoline use has surpassed pre-pandemic levels, supported by an increase in personal transport, but diesel consumption fell on the month and from pre-Covid 2019 levels because of higher retail prices and a monsoon-induced fall in trucking activity. The use of electricity in irrigation and railways and compressed natural gas (CNG) in heavy motor vehicles, as well as a push towards renewable energy sources and the increasing use of electric vehicles will weigh on diesel demand, which is likely to remain flat or taper down in the coming years, Mamadapur said. BPCL operates a 240,000 b/d refinery in Mumbai, a 310,000 b/d refinery in Kochi and a 156,000 b/d refinery in Bina. “Both our [Kochi and Mumbai] refineries have the flexibility of increasing the swing between diesel to gasoline. We are able to use VGO crude grades in Kochi, [which] can be used in [the] fluid catalytic cracking unit (FCCU) and generate more gasoline. In Mumbai, we use naphtha-based crudes, which we can crack in [the] continuous catalytic reforming unit (CCR) and make more gasoline,” Mamadapur said. Although BPCL’s diesel pool is bigger, other oil marketing companies (OMCs) are short of products this year and still have additional requirements for diesel, Mamadapur said. “And our main purpose is to meet full domestic demand… we have a surplus in system.” Other state-run refiners were operating at lower capacity, likely because of the disparity in motor fuel demand, market participants told Argus. OMCs are also short of gasoline, Mamadapur said. “They are importing and we have a surplus. So, we have the bargaining power to give gasoline and diesel to our counterparts. As far as BPCL is concerned, we are secured for 3Q and 4Q to run our refineries at full capacity.” India’s current financial year ends in March 2022. Fellow state-owned refiner IOC has emerged to buy gasoline cargoes through rare tenders while continuing to export diesel because of uneven motor fuels demand. HPCL has also sought gasoline cargoes. There are no expansions planned for the three refineries, but BPCL is looking to tweak some units to increase gasoline production and the swing between diesel and gasoline in the medium term, Mamadapur said. Indian state-run refiners must reconfigure to target lighter products such as gasoline, naphtha and LPG and reduce the amount of diesel, said oil ministry secretary Tarun Kapoor earlier this month. Oil demand growth India’s oil demand will increase in the coming years as industrial expansion will lead to higher energy consumption, but structural shifts in the use of motor fuels such as the switch between gasoline, diesel, CNG and electric will continue to take place, Mamadapur said. He thinks that there will not be any issues until 2040, unless something like hydrogen comes into the market in a big way and fossil fuels are drastically impacted. Import, export strategy BPCL was formulating a strategy for regular exports of oil products, moving away from exports based on the supply-demand imbalance, the company previously said, but did not divulge any additional details on the plans. “We have got plans like semi-term or term contracts of 3 or 6 months based on our views of the international market and where cracks are moving,” Mamadapur said. But the company is not jumping into year-long terms because of market volatility, he added. The Indian market is a top priority and the company will not export by starving the domestic market, he said, adding that BPCL has surplus refinery capacity and storage in its marketing locations to cater to domestic demand while it exports on commitments. The company has also set up an integrated trading desk for procurement of crude and Mamadapur said that it evaluates over 350 crude grades every week, in line with an agenda to diversify its import basket. BPCL procured US grades for the Mumbai refinery and Azeri light and Umm Lulu for Kochi, as gasoline is the need of the hour, he added. India is a net exporter of oil products and imports nearly 84pc of its crude needs. Crude imports in August rose by 16pc on the month to 4.11mn b/d but fell by 12pc from pre-pandemic August 2019, oil ministry data showed. Decarbonisation efforts There is a large push for renewable energy and there could be a reduction in investments in the fossil fuel refining sector in the longer term, while big investments are expected in areas such as solar power, hydrogen and green hydrogen production, Mamadapur said. “India is surplus in refining capacity and exports. In the next 4 or 5 years, I am not seeing any investment in greenfield refineries,” he added. Meanwhile, BPCL is exploring new business opportunities for sustained growth as the energy transition toward a low-carbon future has accelerated and there are plans to use green hydrogen as much as possible at its refineries, company chairman Arun Kumar Singh said. Indian power minister RK Singh said last month that the country has already achieved an emissions reduction of 28pc from 2005 levels against a target of 35pc by 2030 as outlined in its nationally determined contributions, while it is anticipated that 80-85pc of overall power capacity will come from renewables by 2050.
Piped gas: Gujarat usage 2 times Maharashtra’s
Riding high on its large base of residential piped natural gas (PNG) consumers, Gujarat consumes piped cooking gas twice that of Maharashtra. It is about four times the domestic PNG consumption in Delhi, shows data available with the Union ministry petroleum and natural gas. Gujarat saw around 1.162 million standard cubic meter per day (SCMD)—the highest in India—domestic PNG being supplied to individual households during the period from October 2020to March 31. As against this, domestic PNG sales stood 0.573 million SCMD in Maharashtra and 0.3 million SCMD in Delhi, according to a report by the union government’s petroleum planning and analysis cell (PPAC). Deeper penetration of city gas distribution (CGD) network and wider coverage of natural gas transportation grid along with the presence of multiple companies supplying the piped natural gas have made Gujarat the largest natural gas consuming state in India, said CGD industry players. “Unlike Maharashtra or Delhi, the usage of PNG by households in Gujarat is not just restricted to urban and semi-urban areas. Piped cooking gas is available in semi-urban and rural areas of Gujarat as well. Hence, the consumption of domestic PNG is higher in the state,” said an industry veteran. For instance: Gujarat had 2.421 million domestic PNG connections as of March 31, 2021.The number stood at 1.968 million in Maharashtra and 1.056 million in national capital territory of Delhi. It may be mentioned here that gas distribution licenses for all the districts in Gujarat have been issued, making it the only state in India to be covered under 100%CGD network. Usage for geysers for heating water is also another factor responsible for higher residential PNG consumption in the state, added industry players. With large industrial clusters in Morbi, Surat and Bharuch consuming natural gas, Gujarat also consumes the highest industrial PNG in the country. Around 10 million SCMD industrial PNG was sold in Gujarat during October20 to March 2021. As against this, Maharashtra saw sales of 0.6 million SCMD during the same period. Out of the total 11,803 industrial PNG connections in India, Gujarat has the highest 5,411 connections.
Govt hikes gas price by 62 per cent; CNG rates may go up for consumers
The government on Thursday hiked by 62 per cent the price of natural gas that is used to produce electricity, make fertilizers and turned into CNG to use as fuel in automobiles and cooking gas for household kitchens. This is the first increase in rates since April 2019 and comes on back of firming benchmark international prices but does not reflect the spurt in spot or current price of liquefied natural gas (LNG) witnessed during the last couple of weeks. The oil ministry’s Petroleum Planning and Analysis Cell (PPAC) said the rates paid for gas produced from fields given to state-owned Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL) will be USD 2.90 per million British thermal unit for the six-month period beginning April 1. Simultaneously, the price for gas produced from difficult fields such as deepsea, which is based on a different formula, was hiked to USD 6.13 per mmBtu from the current USD 3.62 per mmBtu. This is the maximum price that Reliance Industries Ltd and its partner BP plc are entitled to for the gas they produce from deepsea blocks such as KG-D6. The increase in gas price is likely to result in a 10-11 per cent rise in CNG and piped cooking gas rates in cities such as Delhi and Mumbai, industry sources said. It will also lead a rise in cost of generating electricity but consumers may not feel any major pinch as the share of power produced from gas is very low. Similarly, the cost of producing fertiliser will also go up but as the government subsidises the crop nutrient, an increase in rates is unlikely. At the last revision in April this year, rates paid to ONGC were left unchanged at UD 1.79, while the deepsea gas price was cut from USD 4.06 per mmBtu to USD 3.62. A USD 1 increase in gas price results in Rs 5,200 crore revenue for ONGC on an annualised basis. After accounting for taxes and other levies, it translates into Rs 3,200-3,300 crore in EBDITA for the company, sources said. Gas prices were last raised in April 2019 and have since only fallen due to a drop in global benchmark rates. While the government sets the price of gas produced by ONGC from fields given to it on a nomination basis, it bi-annually announces a cap or maximum price that operators who won exploration acreage under licensing rounds can get. The operators are supposed to do a market price discovery by seeking bids from users but that rate is subject to the price ceiling announced by the government, sources said. Reliance-BP had in the recent price discovery for new gas from their Krishna Godavari basin block, got rates of over USD 6 per mmBtu. “The price of domestic natural gas for the period October 1, 2021, to March 31, 2022, is USD 2.90 per mmBtu on Gross Calorific Value (GCV) basis,” PPAC said. Similarly, “the price ceiling” for gas produced from “discoveries in deepwater, ultra-deepwater and high pressure-high temperature areas” is USD 6.13 per mmBtu, it said. Natural gas price is set every six months — on April 1 and October 1 — each year based on rates prevalent in surplus nations such as the US, Canada and Russia in one year with a lag of one quarter. So the price for October 1 to March 31 is based on the average price from July 2020 to June 2021. The sources said gas prices had fallen when the pandemic broke out but recovered later as demand picked up. The recent spurt in rates will get reflected in prices that become effective from April next year. The gas price fixed in the last couple of years was unremunerative for producers as it was way below the cost of production. ONGC, the sources said, had posted a Rs 4,272 crore loss on gas business in 2017-18, which widen to over Rs 6,000 crore in fiscal April 2020 to March 2021. ONGC had been incurring losses on the 65 million standard cubic metres per day of gas it produces from domestic fields shortly after the government in November 2014 introduced a new gas pricing formula that had “inherent limitations” as it was based on pricing hubs of gas surplus countries such as the US, Canada, and Russia. The sources said ONGC in a recent communique to the government has stated that the break-even price to produce gas from new discoveries was in the range of USD 5-9 per mmBtu. The Congress-led UPA had approved a new pricing formula for implementation in 2014 that would have raised the rates but the BJP-led government scrapped it and brought a new formula. The new formula takes into account the volume-weighted annual average of the prices prevailing in Henry Hub (US), National Balancing Point (the UK), Alberta (Canada), and Russia with a lag of one-quarter. The rate at the first revision, using the new formula, came to USD 5.05 but in the subsequent six-monthly reviews kept falling till it touched USD 2.48 for April 2017 to September 2017 period. Subsequently, it rose to USD 3.69 in April 2019-September 2019 before being cut in subsequent rounds to USD 1.79.
Despite price hike, gas production remains loss-making proposition in India: ICRA
The government may have raised the price of domestic natural gas price by 62 per cent from the existing $1.79 per million British thermal units (mmbtu) to $2.9 per mmbtu but gas production will remain a loss-making proposition for most fields and there will be limited benefit for producing companies, according to ratings agency ICRA. “Increase in gas prices provides limited relief to Indian upstream producers. Even at these prices, gas production remains a loss-making proposition for most fields for the Indian upstream producers notwithstanding some decline in oil field services or equipment costs,” ICRA said in a report. This apart, the depreciation of Indian Rupee against the US Dollar would aid the realisations of the gas producers but only to a modest extent, the agency said, adding the ceiling on price for gas produced from deep water, ultra-deep water, high temperature and high-pressure fields has been announced at $6.13 per mmbtu for the period H2 FY2022, which is 69.3 per cent higher than the price ceiling of $3.62 per mmbtu for the period H1 FY2022. “Domestic gas prices still remain low at an absolute level leading to poor returns for Upstream producers. The absence of a floor and sustained low prices as has been seen in the past few years post implementation of the modified Rangarajan formula make exploration and production unviable even for benign geologies,” said Sabyasachi Majumdar, Senior Vice President, ICRA. He added that accordingly increase in natural gas prices provide limited relief for the Upstream sector vis-a-vis profitability and cash accruals and the demand for a floor for gas price as petitioned by the incumbents in the past would only intensify. The latest domestic gas price increase for the six months period beginning October 2021 was driven by the significant run up in the prices of gas at global gas hubs. Gas prices have risen to multi year highs owing to supply side issues due to planned and unplanned shutdowns, low storage levels in Europe, US etc, lower wind and hydro power generation due to still weather and droughts respectively amid increasing demand due to economic recovery and multiple events of severe weather in several parts of the world especially Asia which accounts for three quarters of the world’s LNG consumption. Additionally, gas consumption has also risen due to switch from coal to gas in China. Accordingly, Asian spot LNG prices have climbed to their highest ever levels of above $30/mmbtu and are more than double of long-term LNG prices. Besides spot LNG, term LNG prices also remain elevated owing to high crude oil prices. “The notified increase in the gas prices would lead to an increase in the variable cost of generation for domestic gas-based power projects by about 40 per cent compared to the cost of generation at the earlier price. The increase is expected to be passed on to the customers, mainly the state distribution utilities,” ICRA said. Also, around 34 per cent of the gas requirement of the fertiliser sector is met through domestic gas while the remaining is met through R-LNG imports. The industry is supplied gas at pooled pricing, which takes into account the weighted average of the domestic and R-LNG prices. With the steep rise in the domestic gas price, the pooled gas price is expected to witness an increase of $0.4 per mmbtu. The increase in gas price for H2 FY2022 should also result in an increase in CNG and PNG prices by the CGD players. Assuming that the CGD players maintain their current absolute contribution margins in Rs per kg and Rs per scm terms, the CGD players could increase CNG price and PNG prices by Rs 4.5-4.7 per Kg and Rs 2.5-2.7 per scm, respectively.
Asian LNG spot price reaches record high of $34.47/mmbtu – Platts data
Asian liquefied natural gas (LNG) spot price rose to a record high on Thursday on the back of robust demand for the super-chilled fuel and low supply. A combination of low stocks and strong demand for gas have pushed up prices in Europe, while a colder than expected winter in North Asia is fuelling the price surge. Price agency S&P Global Platts said on Thursday that its Japan-Korea-Marker (JKM), which is widely used as a benchmark for spot LNG contracts, rose to $34.47 per million British thermal units (mmBtu). It broke the previous record of $32.50 per mmBtu reached in mid-January during the peak of winter, Platts data showed. “The global LNG price rally is largely driven by the European gas situation,” said Ciaran Roe, Platts’ global director of LNG. In Europe, gas storage levels remain suppressed against historical averages, constrained LNG imports and strong gas demand due to post-lockdown economic recovery, Roe said. Fuel shortages in China, which is creating higher demand from utilities, lower than average temperatures expected in China and South Korea and lower capacity utilisation of liquefaction plants globally due to ongoing supply issues, are also factors, he added. Gas price at the Dutch TTF hub, a European benchmark, rallied to new highs on Thursday on supply concerns, forecasts of cold weather and short-covering ahead of the official start to the winter gas season.